Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2013/5/11/business/13057370&sec=business
Published: May 12, 2013
Next week, Zeti will chair the quarterly briefing on the Malaysian economy.
As expected, the benchmark overnight policy rate (OPR) has been maintained at 3%, a level held since May 2011.
Next week, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz will chair the quarterly briefing on the Malaysian economy and her views will be timely since it will come after a slew of macroeconomic data had been released in recent weeks both here and abroad.
The monetary policy statement and whatever comments Zeti chooses to make during the Q1 GDP media briefing will shed some light on the country's economic outlook.
Also at issue is whether the counter-cylical policies in place since 2009 will still be able to support the economy in the face of persistent volatility and weak external demand.
While Zeti will not comment on politics, the fact remains that the quarterly briefing comes less than two weeks after the closely fought 13th general election.
Policy measures such as the cutting of subsidies, an electricity tariff hike and the implementation of the long-postponed goods and services tax are likely questions at the briefing.
This is because economists expect some of the measures, especially the cut to subsidies, to be implemented in the second half of the year given that there is a target to narrow the fiscal deficit to 4% of GDP this year and to 3% by 2015.
There will be a rise in inflation should subsidies be cut although the drop in commodity prices may help stabilise prices.
Given the rise in inflation, there may be a reasonable expectation of a rise in the OPR but this will have to be balanced against growth.
In an email reply last week, Zeti did not give any pointers to the direction of monetary policy, as is her wont, except to say that the current stance on monetary policy is appropriate given the outlook for inflation and growth.
External headwinds
China's economy is usually a good gauge to the health of the global economy since the country is still regarded as the factory to the world.
Therefore, when both the official and HSBC April purchasing managers index (PMI) for the manufacturing sector unexpectedly eased, the concerns are on two fronts.
Firstly, the manufacturing PMI shows that external demand remains weak as the eurozone is still mired in recession and robust US economic growth continues to be a big question.
Lee is for now maintaining CIMB’s year-end OPR target of 3% to 3.25%.
Secondly, this will impact trade with Asean, where Malaysia is one of the most important of the country's trade partners in the 10-member grouping.
Furthermore, the eurozone and US are important trade partners in their own right for Malaysia as well as Asean.
How will this impact the region's trade and manufacturing sector going forward?
The Statistics Department data shows that manufacturing activity remains weak while exports will continue to be volatile in the face of weak external demand.
Alliance Research chief economist Manokaran Mottain says Malaysia will still be supported by domestic factors rather than external even though there has been some improvement in Japan and the United States.
However, he tells StarBizWeek that Malaysia's Q2 data may not improve as much due to political uncertainties surrounding the general election period.
“My main concern is that there are no sudden policy U-turns,” Manokaran says, adding that the house's growth outlook remains unchanged.
However, economists believe that a slower pace of growth for China is actually a good sign as the economy restructures, arguing that 9% or 10% GDP growth a year is unsustainable, especially when growth in the past decade was largely investment-driven and not through improved productivity. Manokaran says that in the case of Malaysia, growth of 5% may be more sustainable than 6%, pointing to asset bubbles in China and the need for policy measures to temper growth as reason for gradual and sustained growth.
Furthermore, observers say more labour-intensive activities may be moved to South Asia or to the lower-cost Asean contries as China moves up the value chain.
What is most interesting and brings hope to China's partners is that while the country's Q1 GDP slowed unexpectedly to a 7.7% expansion year-on-year, the data shows that consumption is growing while the services sector, an indicator of domestic demand, has again made a bigger contribution to overall growth compared to industry, the third quarter in a row it has done so.
Economists at London-based investment bank Schroders feel that while the Q1 data suggests that the Chinese economy is rebalancing towards domestic consumption, it is likely to be a long and slow progress while the pace of economic contraction in the eurozone may be about to worsen despite factory output stabilising.
“With a burgeoning middle class, the growth of Chinese consumption is a long-run, structural trend, more resilient to cyclical swings than investment, an area more sensitive to the business cycle,” they point out in a report.
However, they see further heavy spending on housing and infrastructure in the years ahead as the Chinese government has a target of 60% of the population to be urbanised versus the current levels, at just over 50%.
Where does this leave monetary policy?
The Malaysian economy grew at a 6.4% pace in Q4 and 5.6% for the full-year in 2012 with inflation largely in check at 1.7% amid full employment.
The official target remains for the country's GDP to expand by 5% to 6% this year on a combination of private investment supported by Economic Transformation Programme projects and private consumption fuelled by easy lending conditions.
The market consensus is for the OPR to remain at 3% for the rest of the year although CIMB Investment Bank Bhd economic research head Lee Heng Guie says there may be a revision of 25 basis points upwards in the second-half of the year depending on domestic economic and inflation conditions.
He is for now maintaining the house's year-end OPR target of 3% to 3.25%.
“The conduct of monetary policy is being challenged by very easy global liquidity conditions as prolonged periods of low interest rates induce speculative investment and the build-up of financial imbalances,” Lee says in an April 30 note to clients following the release of Bank Negara's monetary and financial developments report.
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